U.S. Department of Housing and Urban Development. Office of Inspector General for Investigation. Inspections and Evaluations Division

Transcription

1 U.S. Department of Housing and Urban Development Office of Inspector General for Investigation Inspections and Evaluations Division ACORN Housing Corporation, Inc. Evaluation of HUD Housing Counseling Grant Expenditures September 21, 2010 IED

2 Executive Summary The Office of Inspector General, Inspections and Evaluations Division, conducts independent, objective examinations of U.S. Department of Housing and Urban Development (HUD) activities, programs, operations, and organizational issues. In response to a congressional request, we performed an evaluation of grant funds awarded under HUD s Housing Counseling Program to ACORN Housing Corporation, Inc. (AHC), of Chicago, IL, now operating as Affordable Housing Centers of America (AHCOA). We wanted to know whether AHC used HUD grant funds in compliance with grant agreement requirements. During fiscal years (FY) 2008 and 2009, AHC was awarded $3,252,399 in HUD comprehensive housing counseling grants. Our tests focused on HUD funds used to pay the salary and fringe benefit costs (salary expenses) of AHC staff that provided housing counseling directly to clients. More than $2.544 million was charged to the HUD grants as salary expenses ($1.353 million or 83 percent in FY 2008 and $1.191 million or 73 percent in FY 2009). Since many of AHC s counselors also provided counseling services funded through other Federal and non-federal sources, 1 we reviewed the cost allocation methodology of and examined available documentation to support AHC s quarterly billings to the HUD grants. We also examined AHC s other expenditures for accounting and legal services, office leases, and employee benefits for compliance with the procurement provisions of the HUD grant agreements. We observed the following during the course of our evaluation: Salary expenses charged to the HUD housing counseling grants were not fully supported. Payroll records requested did not comply with Office of Management and Budget (OMB) Circular A-122, for example, time sheets did not distribute hours by grant. The caseload allocation method used by AHC for HUD-chargeable salary expenses was problematic and unsupported. Consequently, HUD had no assurance that the counselors salary expenses totaling $2.544 million charged to the HUD grants reflected grant-eligible services. Ineligible salary expenses totaling $65, were charged to the FY 2009 HUD grant. Salary costs for counselors services included pay periods after employment termination for six employees totaling $13, Also, $51, in salary expenses for counselor services incurred in FY 2008 was billed to the FY 2009 grant. Costs charged to the HUD grants must be allowable, reasonable, and allocable according to OMB Circular A-122. Federal procurement standards were not met. AHC did not meet the procurement standards outlined at 24 CFR (Code of Federal Regulations) Part 84 when it obtained accounting and legal services, leased office space, and sought health care and retirement benefits from associated nonprofit organizations. These services were obtained by AHC without ensuring, to the maximum extent practical, open and free competition. 1 AHC also received funding from other Federal and non-federal sources totaling more than $ million during FY 2008 and ii

3 Further, cost or price analysis and documentation to support the basis and justification for the services were not readily available. As a result, AHC could not ensure that it had obtained services for the lowest, most reasonable cost. To confirm counseling services reported to HUD, we interviewed 50 randomly selected AHC clients. With one exception, clients said that they had received AHC s counseling services and most considered the counseling helpful. Sixteen clients succeeded in finding and purchasing homes and were also still living in those homes a year after seeking counseling. For continued approval as a HUD-approved housing counseling agency and for future awards consideration, AHC must bring its operations into full compliance with applicable laws, regulations, and policies governing HUD s Housing Counseling Program. This includes reimbursing the program for unsupported and ineligible salary expenses charged to the HUD housing counseling grants and implementing a time and activities reporting system that meets OMB Circular A-122 requirements. Further, AHCOA needs to implement a procurement system that complies with 24 CFR Part 84. We provided a draft copy of the report to the Assistant Secretary, Office of Housing Federal Housing Commissioner and the executive director of AHCOA on August 16, 2010, and have included their full responses in appendixes A and B, respectively. HUD s Office of Single Family Housing (Single Family) agreed with our observations, while AHC generally disagreed. OIG considers Single Family s response and planned corrective action sufficient to close recommendation 2b. Recommendations 1A through 1C, and 2A remain open. The Comments and OIG Response section of this report contains an evaluation of the responses. iii

4 Table of Contents Introduction...5 Scope and Methodology...7 Observations 1. Salary Expenses Were Not Fully Supported Ineligible Salary Expenses Were Charged Federal Procurement Standards Were Not Met...13 Recommendations...16 Comments and OIG Response...17 Appendixes A. HUD s Office of Single Family Housing s Comments...20 B. Affordable Housing Corporation of America s Comments...23 C. Other Federal and Non-Federal Funding Sources...33 D. Client Case Sampling Methodology and Results...35 iv

5 Introduction HUD s Housing Counseling Program The U.S. Department of Housing and Urban Development s (HUD) Housing Counseling Program is authorized under section 106 of the Housing and Urban Development Act of 1968 (12 U.S.C. (United States Code) 1701x). On September 28, 2007, a final rule was published in the Federal Register at 72 FR Current regulations governing program eligibility and administration are codified at 24 CFR (Code of Federal Regulations) Part 214. In carrying out a HUD-approved counseling program, a grantee is subject to the terms and conditions of the grant agreement with HUD, which is governed by section 106 of the Act, applicable Federal regulations, notices of funding availability for the program, HUD Handbook , the grantee s application submission, Assistance Award/Amendment (form HUD-1044), and the grantee s current HUD-approved housing counseling plan. Regulations at 24 CFR Part 84 provide the uniform administrative requirements for grants between HUD and nonprofit organizations. The regulations require nonprofit grantees to use Office of Management and Budget (OMB) Circular A-122, Cost Principles for Non-Profit Organizations, in determining whether costs incurred are allowable, reasonable, and allocable. OMB Circular A-122 outlines specific guidelines for grant expenditures and the records needed to support those expenditures. Part 84 also prescribes the procurement standards for nonprofit organizations. ACORN Housing Corporation, Inc. ACORN Housing Corporation, Inc. (AHC) was established as a nonprofit corporation in the State of Louisiana on March 20, AHC s primary mission is to empower low and moderate income individuals, families, and communities to obtain and keep affordable, stable, safe, and decent housing. [They] accomplish this through homeownership education and counseling, access to finance, housing development, and advocacy. These services are provided through its offices located nationwide. 2 AHC received its 501(c)(3) status on March 9, 1990, retroactive to March 13, 1985, the date of registration. AHC was founded by organizers that worked for the Association of Community Organizations for Reform Now (ACORN) and, until recent months, maintained an association with that organization. During our review period, the association included leasing space for some branch offices from or to ACORN or associated entities and sharing certain common areas and conference rooms. In addition, accounting and legal services and employee benefits were obtained from other associated nonprofit organizations that also provided similar services to ACORN. 2 In November and December of 2009, AHC closed 10 of its branch offices (El Paso, Kansas City, Las Vegas, New Orleans, Oakland, Portland, Providence, Seattle, Springfield, and Tampa), leaving its Chicago office and 18 branch offices open (Albuquerque, Baltimore, Bridgeport, Milwaukee, New York City, Orlando, Dallas, Philadelphia, Phoenix, Sacramento, Fresno, Houston, Los Angeles, San Antonio, San Jose, St. Paul, Miami, and Washington, DC). 5

6 AHC s corporate office, located at 209 West Jackson Blvd, Chicago, IL, provides administrative and centralized management of its branch offices. All expenses (e.g., vendor payments, employee salaries) are paid out of the Chicago (national) office. Funds are not distributed to the branch offices; the only distribution of funding that occurs is for budgetary purposes. On January 8, 2010, AHC changed its corporate name and now operates as Affordable Housing Centers of America (AHCOA). AHCOA has offices in 19 cities, 14 States, and the District of Columbia. 3 Funding Sources HUD has been a substantial funding resource for AHC, awarding more than $19 million in housing counseling grants since During fiscal years (FY) 2008 and 2009, AHC received $3,252,399 from HUD to provide comprehensive housing counseling services as a national intermediary. 4 $1,628,829 (effective October 1, 2007, through September 30, 2008, or FY 2008) $1,623,570 (effective October 1, 2008, through September 30, 2009, or FY 2009) AHC also received funding from other Federal and non-federal sources, totaling more than $ million, during the same period. 5 NeighborWorks America (NeighborWorks), a congressionally chartered nonprofit organization headquartered in Washington, DC, was the source for 95 percent (or $ million) of these funds. NeighborWorks administers the National Foreclosure Mitigation Counseling (NFMC) program created by the Consolidated Appropriations Act of 2008 (P.L. (Public Law) ). The NFMC program awards grants to HUD-approved housing counseling intermediaries, State housing finance agencies, and NeighborWorks organizations to provide foreclosure mitigation counseling and legal assistance to homeowners at risk of foreclosure. Eligible Activities Under the terms of the HUD housing counseling grants, AHC was eligible to seek reimbursement for individual counseling or group education/classes, marketing and outreach initiatives, training, computer equipment/systems, and administrative costs. 6 AHC provides five types of comprehensive housing counseling prepurchase counseling, predatory lending housing counseling, home equity and refinance housing counseling for existing homeowners, delinquency and default counseling, and HECM (home equity conversion mortgage) and reverse mortgage counseling. AHC s executive management emphasized that all first-time home 3 Affordable Housing Centers of America, Who We Are, (content current as of September 21, 2010) 4 National intermediaries offer housing counseling services directly through their branch offices or indirectly through smaller affiliates operating in multiple regions of the country. 5 See appendix C Other Federal and Non-Federal Funding Sources. 6 Notices of Funding Availability for the Housing Counseling Programs, published for the FY 2008 and 2009 grants. 6

7 buyers were serviced under the HUD grants, while the NFMC grants were restricted to delinquency and foreclosure mitigation counseling. Expenditures AHC used the HUD housing counseling grants primarily to reimburse the salary and fringe benefit costs (salary expenses) of its counseling staff. More than $2.544 million was charged to the HUD grants as salary expenses ($1.353 million or 83 percent in FY 2008 and $1.191 million or 73 percent in FY 2009). AHC expended both HUD grants in full by the end of the third quarter (June 30th) each fiscal year. The HUD grants were funded on a cost reimbursable basis, permitting AHC to recover the salary expenses incurred and paid to its counselors. For the NFMC grants, AHC was paid fees based on a three-tiered structure that defines the estimated cost for a counseling activity, capped at $350 per individual client counseled. In early 2008, AHC s national office received the first of two direct grants totaling more than $25.05 million from NeighborWorks. An additional $806,519 in NFMC grant funds was indirectly awarded to AHC s branch offices located in California, Florida, Minnesota, and Missouri. AHC attempted to use the same system (Housing Counseling Online or HCO) that it uses to track its HUD cases for its NFMC cases. However, according to AHC the HCO system did not operate well with the delinquency and foreclosure cases. In October 2008, AHC began to use the HELP (Home Equity Loss Prevention) system for its NFMC cases. AHC indicated that the HCO system was used to track time spent on HUD counseling activities but determined in March 2008 that HCO was far too burdensome for counselors to use to track minutes that they worked on each case. With the foreclosure crisis exploding, and counselor caseloads doing the same, it simply was not feasible to expect a counselor to log into HCO and then record every minute worked on every activity. According to AHC executive management, the nonprofit was deeply impacted by the housing market collapse in 2008 and Its primary service prepurchase counseling for first-time and minority home buyers was quickly supplanted by families in default on their mortgages and facing foreclosure. Counseling staff services were shifted to address this challenge, and caseload allocation procedures were put in place to determine the percentage of employee expenses billable to the HUD housing counseling grants and other grants, primarily the NFMC grants. AHC believed that the caseload allocation methodology was acceptable given the urgency of increasing foreclosure and delinquency cases under the NFMC grants. Scope and Methodology The objective of our evaluation was to determine whether AHC used its HUD comprehensive housing counseling grant funds in compliance with grant agreement requirements. To accomplish this objective, we examined the accounting and administrative records and documents supporting AHC s use of the HUD funds. 7 Our examination covered the expenditure of HUD funds from October 1, 2008, through September 30, 2009; specifically, salary expenses funded by the HUD grants for staff that provided housing counseling to AHC clients. 7 Testing was limited in some instances due to the availability of records. 7

8 Because many of these counselors also provided counseling services funded through other sources, we focused on the caseload allocation methodology used and the documentation to support AHC s quarterly billings to the HUD grants. We also examined AHC s expenditures for accounting and legal services, office leases, and employee benefits for compliance with the procurement provisions of the HUD grant agreements. We met with and interviewed AHC s executive management, comptroller, and accounting consultant to gain an understanding of the billing processes and associated controls to ensure proper cost allocation. We also interviewed current/former regional directors, branch office managers, 8 housing counselors, and a random sample of prepurchase housing counseling clients. 9 We interviewed staff from HUD s Office of Single Family Program Development, Program Support Division, responsible for overseeing AHC s housing counseling services, and examined related records of AHC s quarterly LOCCS (Line of Credit Control System) draws from the two grant awards. We conducted the evaluation in accordance with the Quality Standards for Inspections issued by the President s Council on Integrity and Efficiency. 8 We granted a request by AHC s general counsel to be present during interviews of current regional directors and branch office managers. 9 See appendix D Client Case Sampling Methodology and Results. 8

9 Observations Observation 1: Salary Expenses Were Not Fully Supported AHC could not fully support its salary and fringe benefit costs (salary expenses) charged to the FY 2008 and 2009 HUD comprehensive housing counseling grants. Payroll records requested did not comply with OMB Circular A-122, for example, the time sheets did not distribute hours by grant. Also, the caseload allocation methodology used by AHC for HUD-chargeable salary expenses was problematic and unsupported. As a result, there was no assurance that the $2.544 million in salary expenses allocated (charged) to the HUD grants ($1.353 million in FY 2008 and $1.191 million in FY 2009) reflected grant-eligible services. OMB Circular A-122 OMB Circular A-122, attachment B, paragraph 8. Personal Services, M. Support of Salary and Wages, requires that Charges to awards for salaries and wages, whether treated as direct costs or indirect costs, will be based on documented payrolls approved by a responsible official(s) of the organization. The distribution of salaries and wages to awards must be supported by personnel activity reports. Reports reflecting the distribution of activity of each employee must be maintained for all staff members (professionals and nonprofessionals) whose compensation is charged, in whole or in part, directly to awards. Reports maintained must reflect an after-the-fact determination of the actual activity of each employee. Each report must account for the total activity for which employees are compensated and in fulfillment of their obligations to the organization. The reports must be signed by the individual employee, or by a responsible supervisory official. The reports must be prepared at least monthly and must coincide with one or more pay periods. FY 2008 and 2009 Housing Counseling Grant Agreements Article X Payment Requests, E. Documentation of Expenses, requires AHC to maintain source documentation of direct costs, such as invoices, receipts, cancelled checks, and salary reports, to support all LOCCS draw requests for payment. This information must be made available to HUD upon request and maintained for a period of at least three years after the expiration of the grant period or date of last payment, whichever occurs first. Payroll Records Requested Noncompliant AHC s summary schedules of counselors salary expenses, submitted to HUD to support its quarterly draws of housing counseling grant funds for FY 2008 and 2009, were based on time sheets that documented the number of hours worked and leave taken by counselors. We 9

10 requested payroll records for two test pay periods: (1) January 27 through February 9, 2008 (FY 2008), and (2) December 14 through December 27, 2008 (FY 2009). In all but three cases, the time sheets provided did not account for total activities (e.g., distribute hours by grant) of each counselor on a daily basis. A determination could not be made as to what activities the employees performed or which grant to charge for those activities. Consequently, HUD had no assurance that it did not bear more than its fair share of the costs incurred for salary expenses of AHC s counselors. FY 2008 Test Pay Period For the test pay period, salary expenses totaling $85,145 for 66 employees were charged to the FY 2008 HUD grant. AHC provided time sheets for 65 employees and payroll register extracts for 66 employees. 10 The time sheets documented the number of hours worked and leave taken and were generally signed by the employees and their supervisor. Only one of the time sheets specified time by grant funding source on a daily basis. It appears that AHC did not charge the full amount to the HUD housing counseling grant. The remaining 64 time sheets did not account for the total activities of each counselor on daily basis. FY 2009 Test Pay Period For the test pay period, salary expenses totaling $74, for 66 employees were charged to the FY 2009 HUD grant. AHC provided time sheets and payroll register extracts for 60 of the 66 employees. The time sheets documented the number of hours worked and leave taken and were generally signed by the employee and the supervisor. Only 2 of the 60 time sheets specified time by grant funding source on a daily basis. Employee A Hours % Charged to HUD housing counseling grant 90 hours 86 96% Time sheet Housing counseling grant 44 hours 44 49% Road Home 46 hours 46 51% Employee B Hours % Charged to HUD housing counseling grant 90 hours 68 75% Time sheet Housing counseling grant 45 hours 45 50% Houston CDBG * 45 hours 45 50% * CDBG = Community Development Block Grant The two time sheets did not agree with the allocation of salary expenses (e.g., 96 percent versus 49 percent for employee A) by AHC to the HUD housing counseling grant using the caseload allocation methodology (described below). The remaining 58 time sheets did not account for the total activities of each counselor on a daily basis. 10 Payroll register extracts provided for the two test pay periods were reviewed to confirm existence of entries for the respective employees. 10

11 Caseload Allocation Methodology Problematic and Unsupported AHC s caseload allocation methodology for salary expenses to the HUD housing counseling grants proved problematic in an environment of multiple funding sources and was unsupported. In addition to the more than $3.252 million in FY 2008 and 2009 HUD grants, AHC received funds from other Federal and non-federal sources totaling more than $ million. 11 NeighborWorks was the source for 95 percent (or $ million) of these funds. The housing counseling service costs were either charged as salary expenses to the HUD housing counseling grants or as fees to the NeighborWorks NFMC grants. For counselors who provided services under both grants, reimbursement of their salary costs for HUD billing purposes was based on a percentage derived from the ratio of HUD to NFMC cases as opposed to using the actual number of hours attributable to the HUD housing counseling grant. For example, AHC billed HUD for the services of 66 employees during the test pay period in FY The percentage of salary expenses to HUD was 17 employees billed at 100 percent, 17 employees billed at 70 to 99 percent, 17 employees billed at 50 to 69 percent, and 15 employees billed under 49 percent. Also, missing was documentation of the actual activities to support the percentages of allocations to the HUD grant. As noted above, review of payroll records for 60 employees for the FY 2009 test pay period showed that time sheets were maintained; however, there were only two cases in which employees time sheets specified time by grant funding source on a daily basis. Despite the breakout of time by grant funding source, AHC charged the HUD housing counseling grant the amount of salary expenses using the caseload allocation methodology instead of the actual numbers of hours reported by the counselors on their time sheets. Because of the multiple funding sources, careful control of cost allocation was imperative to reduce the risk of inequitable charges when counselors time was split between HUD, NFMC, and/or other funding sources. Availability of records impeded our attempt to trace AHC s summary schedules of counselors salary expenses to the housing counseling activities that occurred during the two test pay periods. AHC s deputy director explained that it would be difficult to provide the information for some cases due to office closures and dismissal of personnel, which resulted in the transfer of client cases to other counselors, and the nature of the system used to record case activities. According to the deputy director, the historical data (electronic records) for the transferred cases no longer existed in the HCO system. We interviewed a random sample of 50 clients that AHC reported to HUD as having received one-on-one prepurchase housing counseling during the period April 1 to June 30, Of the clients interviewed, 13 said they spent 50 minutes or less with a counselor in face-to-face 11 See appendix C Other Federal and Non-Federal Funding Sources. 12 These clients received counseling from 21 branch offices located nationwide, including Albuquerque, Springfield, Providence, and Tampa. Refer to appendix D Client Case Sampling Methodology and Results. 11

12 interviews, 19 stated that they spent 1 to 2 hours, and another 4 clients said 3 to 5 hours. Five recalled spending between 2 and 8 hours total in group and face-to-face counseling sessions. Six other clients, who participated in the group session only, recalled spending between 1 and 8 hours in the seminars. Observation 2: Ineligible Salary Expenses Were Charged AHC billed the FY 2009 HUD housing counseling grant for the salaries of six employees who were no longer employed with the nonprofit. It also billed the grant for salary expenses incurred before the October 1, 2008, the start date of the grant. For a cost to be eligible for reimbursement under the HUD grant, it must be allowable, reasonable, and allocable according to OMB Circular A-122. The ineligible salary expenses totaled $65, Costs Billed for Salaries of Terminated Employees AHC s billing of salary expenses for counselor services included pay periods after employment termination for six employees, resulting in the grant being overbilled $13, (see table below). AHC billed the services of 105 counselors to HUD in FY We examined 18 employee personnel files, which included 8 employees that were identified as potential overbilling cases, during our analysis of AHC records. For the eight employees, documentation confirming termination dates consistent with our prior analysis was present for four employees, the termination date was not in the personnel file of one employee, and the personnel file of one employee was missing. Documentation for two employees supported a conclusion that no overbilling occurred. Billed Employee Office Termination Date Overpaid Pay Periods Hours Rate HUD Overbilled Amount 1 Atlanta 2/27/ $ % $3, Chicago 3/13/ $ % $3, Dallas 3/13/ $ % $1, Providence 2/13/ $ % $2, Seattle 12/5/ $ % $1, Washington, DC 12/15/ $ % $1, Total $13, We interviewed three of the terminated employees. Two confirmed the date of termination. The third said that she had terminated her employment 2 weeks earlier than the date cited in AHC s records. Costs Incurred in FY 2008 Billed to FY 2009 Grant AHC billed salary expenses for services performed in FY 2008 September 22 through September 30, 2008 to its FY 2009 grant award. Article III of the HUD grant provides that [t]he Period of Performance shall begin on October 1, 2008 and expires at midnight on September 30, Further, article IX Price, D. 3, Period of Availability of Funds, states 12

13 that the Grantee may charge to the Grant only Allowable Costs resulting from obligations incurred during the Performance Period. Because AHC counseling services were performed and costs incurred before the authorized start date of the FY 2009 HUD grant, the costs were ineligible for reimbursement. The ineligible costs totaled $51, AHC had drawn its FY 2008 housing counseling award in full as of June 30, As stipulated in the grant agreements (article IV Statement of Work), HUD handbook, and other guidance, HUD funds are not intended to cover the total costs of carrying out a grantee s counseling program. Observation 3: Federal Procurement Standards Were Not Met AHC did not meet the procurement standards outlined at 24 CFR Part 84 when it obtained accounting and legal services, leased office space, and sought health care and retirement benefits from associated nonprofit organizations. 13 These services were obtained by AHC without ensuring, to the maximum extent practical, open and free competition. Further, cost or price analysis and documentation to support the basis and justification for the services was not readily available. AHC s executive director told us that AHC operated in this manner because its managers believed that these transactions met Federal procurement requirements and resulted in lower costs to AHC. As a result, AHC could not ensure that it had obtained services for the lowest, most reasonable cost. 24 CFR Part 84 Article VI of the HUD grant agreements provides in paragraph A that the recipient is subject to the requirements of 24 CFR Part 84, as applicable. Section of these regulations provides that All procurement transactions shall be conducted in a manner to provide, to the maximum extent practical, open and free competition. The recipient shall be alert to organizational conflicts of interest as well as noncompetitive practices among contractors that may restrict or eliminate competition or otherwise restrain trade. Section requires the recipient to perform some form of cost or price analysis in connection with every procurement action. Moreover, section requires the procurement records and files for purchases in excess of the small purchase threshold to include (a) basis for contractor selection, (b) justification for lack of competition when competitive bids or offers are not obtained, and (c) basis for award cost or price. Accounting and Legal Services AHC obtained accounting and legal services from a nonprofit organization, Citizens Consulting, Incorporated (CCI), during part of our review period. The accounting services that CCI provided included accounts payable and payroll functions. CCI charged AHC fees based on a percentage 13 Associated organizations are described in AHC s financial statements as nonprofits that are controlled by independent boards of directors but share certain common operating costs. 13

14 of AHC s total expenditures (3.84 and 4.55 percent during FY 2008 and 2009). AHC s financial statements showed that CCI was paid in total $345,174. A portion of these costs was charged to the HUD housing counseling grants through AHC s indirect cost rate. AHC obtained CCI s services without soliciting open and free offers from other accounting and legal services firms. As a consequence, AHC could not demonstrate that the costs of CCI s services reflected a required competitive pricing process. According to AHC s executive director, the arrangement with CCI was intended to provide AHC with quality services at a reasonable price because it specialized in servicing only AHC and other ACORN-related organizations. AHC also surveyed the financial statements of other nonprofit organizations in 2007 and concluded that it generally spent a lower percentage of its total expenditures on these services. Given the variances in the types and structures of the nonprofit organizations surveyed and quality of services obtained, we did not consider AHC s conclusions compelling or consistent with the expectations of pricing based on open and free competition. Rather, as an associated nonprofit, CCI s services were essentially a sole source arrangement that lacked an arms length basis for demonstrating cost reasonableness. According to the executive director, the quality of CCI s services deteriorated substantially after hurricane Katrina in 2005, prompting AHC to end its relationship with CCI in Office Leases AHC leased branch office space from associated nonprofit organizations without obtaining competitive bids or quotes from other office space providers. The nonprofit organizations included ACORN in San Jose and Sacramento, CA; Elysian Fields Corporation, Inc., in New Orleans, LA; and New Mexico Organizing and Support Center, Inc., in Albuquerque, NM. Leasing arrangements, in some instances, included sharing the use of common areas and conference rooms with the other nonprofit organization. Branch office leasing costs were charged directly to the HUD housing counseling grants based on the ratio of total payroll costs to payroll costs attributable to the HUD grants. 14 In a letter, dated July 14, 2010, AHC s general counsel asserted that AHC managers who found space for branch offices looked at competitors offerings. The problem is that it was not documented, not that it did not happen. Attached to the letter was information showing comparisons of rents per square foot paid by AHC in 2008 and 2009 to market rent data for class B office space provided by two commercial real estate firms for cities where branch offices were located. In most instances, these comparisons showed that rental rates paid by AHC were less than the market rates provided by the real estate firms. For some locations, however, no comparable data were available. We believe that the market rate comparisons were an inadequate substitute for a competitive procurement process. The market data provided averages; the data did not necessarily provide information specific to the locations and timeframes for which AHC leased branch office space. 14 Refer to observation 1 Salary Expenses Were Not Fully Supported. 14

15 Moreover, because the cited leasing arrangements were with associated nonprofits, the lease arrangements were essentially sole source transactions, not arms length competition. Health Care and Retirement Benefits AHC obtained health care benefits for its employees from two associated nonprofit organizations during our review period: the Council Health Plan and Community Health Insurance Plan (CHIP). According to AHC s financial statements, Council Health Plan was paid $829,660 during FY 2008 and 2009, ending in June HUD records showed that CHIP charged AHC at a set rate ($442.62) each month for each employee on the payroll. The costs of both plans were billed to the HUD counseling grants based on percentages of employee gross pay charged to the HUD grants. AHC ended its relationship with CHIP and was in the process of obtaining health insurance for its employees by soliciting quotes from independent providers in early AHC provided no evidence that it had solicited quotes from other health care providers, as required, before entering into these arrangements with Council Health Plan and CHIP. AHC s retirement funds were managed by an associated organization called Council Benefit Association (CBA) during part of the review period. Contributions were made generally on the basis of 10 percent of a participating employee s gross pay. In FY 2008 and 2009, AHC incurred costs in connection with this retirement plan of $460,630 and $384,693, respectively. These costs were charged to the HUD grants based on the percentage of an employee s gross pay charged to HUD. Again, AHC did not seek to obtain the retirement plan services provided by CBA from other providers. Attached to the AHC general counsel s July 14, 2010, letter was a July 13, 2010, memorandum from AHC s outside legal counsel regarding health care and retirement benefit services provided by the associated nonprofits. The memorandum described the considerable efforts taken by the boards of trustees responsible for the administration of CHP [Council Health Plan] and CBA and responsible for replacing CHP with CHIP. One of the four trustees was the president of AHC. As an example, the memorandum stated that selection of accountants for CBA was the subject of a formal Request for Proposal. However, the nonprofits for AHC s health care and retirement benefits were not the HUD grantee. As the grantee, AHC was obligated to follow procurement requirements in the selection of these providers. No evidence was presented indicating that it had done so before participating in Council Health Plan, CHIP, or CBA. CBA stopped accepting payroll contributions in 2009 and began a process of dissolution. At the end of 2009, AHC established its own qualified Employee Retirement Income Security Act retirement plan with the assistance of independent providers of retirement services. 15

16 Recommendations For continued approval as a HUD-approved housing counseling agency and for future awards consideration, AHC (now operating as AHCOA) must bring its operations into full compliance with applicable laws, regulations, and policies governing HUD s Housing Counseling Program. The inability to fully support salary expenses allocated to the HUD grants raises serious concerns about the integrity of those charges, particularly given the millions of Federal and non-federal dollars made available to AHC in FY 2008 and Further, services procured from ACORN associated organizations failed to meet the required tests of open and free competition. Cost or price analysis and documentation to support the basis for the services procured were not readily available. As a result, AHC could not ensure that it had obtained services for the lowest, most reasonable cost. We recommend that HUD s Office of Single Family Housing, Program Support Division, require AHCOA to 1A. Provide support for the salary and fringe benefit costs (salary expenses) allocated to the FY 2008 and 2009 HUD grants or reimburse the HUD Housing Counseling Program for amounts unsupported from non-federal funds. At a minimum, the amount of reimbursement should include the $159,683 for the two test pay periods ($85,145 for FY 2008 and $74,538 for FY 2009). 1B. Reimburse the HUD Housing Counseling Program $65, from non-federal funds for the ineligible salary expenses ($13, and $51,830.82) charged to the FY 2009 grant. 1C. Implement a time and activities reporting system that complies with OMB Circular A- 122 and a procurement system that complies with the terms of 24 CFR Part 84. We recommend that HUD s Office of Single Family Housing, Program Support Division 2A. Consider placing AHCOA in inactive status while it initiates corrective actions to address the exceptions and recommendations (1A through 1C) in this report. 2B. Provide AHCOA with technical assistance and guidance as needed. 16

17 HUD s Office of Single Family Housing Comments and OIG Response We commend HUD s Office of Single Family Housing s (Single Family) efforts to expand oversight through contract services to ensure ongoing compliance reviews of all housing counseling intermediaries financial and administrative practices. Expansion of oversight efforts to include review of financial and administrative practices will help to improve and further strengthen HUD s Housing Counseling Grant program. Single Family s response to the draft report is included in appendix A. OIG Response Single Family asserts that appendix D is not relevant to the OIG s major observations and recommends removal of the appendix from the final evaluation report. We disagree with Single Family s assertion. The appendix provides a description of the sampling methodology used and reflects the results of the interviews performed. The appendix was adjusted accordingly with additional information, as deemed necessary. We agree with Single Family s planned actions to require AHCOA to provide documentation to address observations and resolve the related recommendations. OIG considers Single Family s response and planned corrective action sufficient to close recommendation 2b. However, regarding recommendation 2A, a follow-up performance review by Single Family is crucial to determine whether AHCOA has taken actions to correct the deficiencies identified in this report and to ensure compliance with Federal requirements. Recommendations 1A through 1C, and 2A remain open. OIG will follow-up with Single Family to determine the status of the corrective actions taken. Affordable Housing Corporation of America (AHCOA) AHCOA s response to the draft report did not change the reported observations: (1) salary expenses charged to the HUD housing counseling grants were not fully supported; (2) ineligible salary expenses totaling $65, were charged to the FY 2009 HUD grant; and (3) Federal procurement standards were not met. While AHCOA generally does not agree with several of the observations, the response purports that they have completed many of the corrective measures suggested by the OIG. HUD Single Family is responsible for ensuring resolution and implementation of the evaluation recommendations. We commend AHCOA s efforts to bring its operations into compliance with Federal requirements and its willingness to resolve the issues identified in the report. AHCOA s response to the draft report is included in appendix B. Names of individuals contained within the body of the response have been redacted. In addition to the formal response, AHCOA provided various supplemental documents that are referenced as attachments in its response to the draft report. These supplemental documents, identified as Confidential Not for Public Dissemination by AHCOA s legal counsel, are being provided separately to Single Family s Program Support Division. 17

18 OIG Response 1. Allocation of Salary Expenses to Grants The observation was adjusted accordingly to reflect the additional payroll records submitted by AHCOA for the FY 2008 test pay period. AHCOA s response states that its records support the allocation of counselor salary expenses to the HUD grant. We disagree with AHCOA s assertion, the observation and related recommendations remain. In all but three cases, the time sheets did not reflect the total activities (e.g., distribution of activities) of each counselor on a daily basis as required by OMB Circular A-122. A determination could not be made as to what activities the employees performed or which grant to charge for those activities. HUD has no assurance that the salary expenses charged to the HUD grants reflected grant-eligible services. We also disagree with AHCOA s assertion that its caseload allocation method meets Federal grant requirements. AHCOA s claim that the impracticality of tracking time spent by grant was the impetus for the caseload methodology does not absolve AHCOA from maintaining auditable records of client services and related grant expenditures as required by the terms of the HUD housing counseling grants. The observation and related recommendations remain. Salary expenses at AHCOA for its counselors represent direct costs to be charged directly to the grant for which the counseling service was provided. AHCOA s assertion that the counselor salary expenses are shared or joint costs and the inference that OMB Circular A-122 s treatment of indirect costs applies is incorrect. Indirect costs are costs incurred for common or joint objectives (e.g., accounting, human resources, and salaries of executive management) that cannot be specifically attributed to a particular final cost objective. AHCOA s claim that its caseload allocation system meets the criteria of OMB Circular A-122 and results in equitable distribution of joint costs is not proven. As stated in AHCOA s response the salary expenses are direct costs. In effect, AHCOA s response supports our position that the system does not comply with the Circular. The caseload allocation system in place used a percentage derived from the ratio of HUD to NFMC cases, instead of the actual number of hours worked by employees attributable to a particular grant, to determine the amount of salary expenses to charge the HUD grants. Further, the time sheets (pre- and post-caseload allocation system) did not distribute counselors time by activity. The time sheets only captured the total hours worked per day and did not contain any details (with the exception of three cases) as to how the time should be charged by grant or other funding source. AHCOA s response asserted that OIG s chart on p. 12 of the draft report did not include delinquency cases that were handled by AHCOA counselors. The response specifically states that these cases were handled pursuant to HUD funding. Based on that assertion, the table has been removed. However, the table s removal does not invalidate our observation that salary expenses charged to the HUD grants were unsupported. We also note the delinquency list reviewed by OIG did not include any information to differentiate a case by branch office. 18

19 2. Specific Salary Expenses AHCOA did not dispute that ineligible salary expenses were charged to the FY 2009 HUD housing counseling grant. Based on the supplemental information provided by AHCOA, we determined that the total ineligible salary expenses charged to the grant was $ 65, AHCOA charged the grant $13, for terminated employees salaries and $51, for counseling services costs that were incurred before the FY 2009 authorized start date. 3. Procurement AHCOA asserts that services and rental space were procured at fair and reasonable rates for all instances cited. However, based on review and consideration of AHCOA s response the observation remains the same. The procurement of accounting and legal services, office space, and benefits through associated nonprofits did not demonstrate open and free competition in accordance with 24 CFR Part

20 Appendix A HUD s Office of Single Family Housing s Comments 20

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23 Appendix B Affordable Housing Corporation of America s Comments 23

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33 Appendix C Other Federal and Non-Federal Funding Sources Entity Location Period Amount Purpose Connecticut Housing Finance Authority Connecticut 03/27/08 10/31/09 $ 127, Connecticut Housing Urban rehabilitation Connecticut 06/30/08 09/30/08 Finance Authority homeownership program Connecticut Housing Finance Authority Connecticut 06/30/08 09/30/08 Home buyer's seminars Connecticut Housing Family foreclosure/subprime Connecticut 03/27/08 10/31/09 Finance Authority counseling Louisiana Road Home Program Louisiana 11/01/07 10/31/08 $ 590, Louisiana Road Home Program Louisiana 11/01/07 10/31/09 $10, Commonwealth of Massachusetts, Dept. of Housing & Community Boston, MA 07/01/08 06/30/09 $33, Development HECAT* Minnesota Foreclosure prevention St. Paul, MN 01/01/08 12/31/08 $48, Housing Finance Agency assistance program HECAT Minnesota Foreclosure prevention St. Paul, MN 10/01/07 09/30/08 $ 15, Housing Finance Agency assistance program Minnesota FHIP** 01/01/09 12/31/09 $100, NFMC National/Chicago Chicago/National 03/01/08 12/31/08 $ 7,850, NFMC National/Chicago Round 2 Chicago/National 07/01/08 12/31/09 $16,000, Counseling funds NFMC National/Chicago Round 2 Chicago/National 07/01/08 12/31/09 $1,200, Legal assistance NFMC California Rural Community Assistance Sacramento, CA 03/03/08 12/31/08 $315, Corporation NFMC Florida Orlando/Miami 04/01/08 12/31/08 $162, NFMC Minnesota Minnesota Housing St. Paul, MN 04/30/08 06/30/10 $126, Finance Agency NFMC Missouri Missouri Housing Development St. Louis, MO 03/01/08 12/31/08 $101, Commission NFMC Missouri Missouri Housing Development Commission Kansas City, MO 03/01/08 12/31/08 $101,

34 Entity Location Period Amount Purpose Minnesota FHIP 01/01/08 12/31/08 $100, Jersey City Jersey City, NJ 10/01/08 09/30/09 $25, Home buyer counseling & education program Jersey City Jersey City, NJ 10/01/07 09/30/08 $25, Home buyer counseling & education program CDBG Houston Houston, TX 07/01/08 06/30/09 $31, First time home buyer CDBG Houston Houston, TX 07/01/08 06/30/09 $ 5, First time home buyer City of Houston Housing & Community Houston, TX 06/23/08 06/23/09 $155, Delinquency Development Chicago CDBG 01/01/08 12/31/08 $22, Illinois Housing Development Agency Chicago, IL 07/01/09 06/30/11 $50, Milwaukee Ross Grant 03/01/07 06/30/08 $25, Housing Authority of the City of San Bernardino 01/01/07 12/31/07 $5, Orange County CDBG Orlando, FL 03/08 02/09 $45, Total $27,269, Fee for service, total award amount not provided Information not provided * HECAT= Homeownership Education, Counseling and Training ** FHIP= Fair Housing Initiatives Program 34

35 Appendix D Client Case Sampling Methodology and Results 15 The objective of our evaluation was to determine whether AHC used its HUD comprehensive housing counseling grant funds in compliance with grant agreement requirements. To accomplish this objective, we performed additional procedures to confirm AHC s client counseling services reported to HUD and funded through HUD housing counseling grants. From AHC s data records, we selected a random sample of 169 clients that received one-on-one prepurchase housing counseling at AHC offices nationwide between April 1 and June 30, We attempted to contact all 169 AHC clients for interview. We were successful in speaking with 50 clients or 30 percent of the sample. Sampling Methodology We obtained and analyzed the housing counseling agency fiscal year activity reports 16 for FY 2009 that AHC submitted to HUD and corresponding client data (e.g., contact information) maintained in AHC records. The activity reports contained 21,134 records, reflecting 10,645 client cases and 32 AHC branch offices. AHC reported 12 types of counseling services. Services Count Completed prepurchase home buyer education workshop 7,820 Completed financial literacy workshop, including home financing, budgeting, and/or credit repair 190 Completed resolving or preventing mortgage delinquency workshop 60 Completed nondelinquency postpurchase workshop, including home maintenance and/or financial management for homeowners 128 Completed fair housing workshop 92 Completed predatory lending workshop 1,383 Completed rental workshop 3 Other workshop 6 Seeking prepurchase home buyer counseling 10,619 Seeking help with resolving or preventing mortgage delinquency 190 Seeking help with home maintenance and financial management for homeowners 641 Seeking help in locating, securing, or maintaining residence in rental housing 2 Total 21,134 To contact AHC clients who were seeking assistance in becoming homeowners, we limited our sample selection to the 10,619 records labeled as Seeking Pre-purchase Homebuyer Counseling. We performed procedures to remove duplicate case numbers and records that did not have a case number, resulting in a universe of client cases totaling 9, The client case sampling methodology and results are presented for informational purposes only; the results were not projected to the universe of clients that received pre-purchase counseling. 16 Form HUD-9902 client case data reported by AHC as being attributable to the HUD housing counseling grant for each office location was obtained and analyzed. 35